Decontrol of Petroleum Pricing: Time to Act

The existing petroleum subsidy regime pampers public sector oil marketing companies at the cost of consumers. With international crude oil prices ruling low, it is high time the government acted to make good on its promise to decontrol petroleum product pricing

Noor Mohammad Delhi, Hardnews

The precipitous fall in international crude oil prices has provided a big relief to the Indian government reeling under fuel subsidy burden. However, the government cannot bank on low oil prices to continue with the existing subsidy regime, given that the current fall in oil prices is not due to any increase in supply but because of demand destruction caused by deepening economic recession. And if the historical trends in oil markets are anything to go by, it is not difficult to see that prices could easily surge when the world economy comes out of the current mess. Besides, crude oil prices are also highly sensitive to geo-political dynamics, especially in the Middle East.

With India already meeting over 70 per cent of its crude oil requirement from imports and this import dependence is growing every year, the existing subsidy dispensation is unsustainable. Apart from causing unbearable strain on the government's fiscal, it also shields public sector oil marketing companies (OMCs) from private competition at the cost of consumer interests.

Under the existing petroleum subsidy regime, the government compensates OMCs for selling key transport fuels such as petrol and diesel at below market price, while private retailers such as Essar and Reliance have been left out of this arrangement. Since these private players cannot match the subsidised fuel price offered by OMCs, they are at a clear disadvantage vis-à-vis the latter.

Significantly, these private players had to close down their petrol pumps in the past year when it became commercially unfeasible for them to keep running their operations in the face of high subsidisation of OMCs' fuel prices. While Essar has reopened most of its refueling stations in the wake of the international crude oil crash, Reliance is yet to take a final decision in this matter.

When the government dismantled the administered price mechanism (APM) regime in 2002, it had promised to gradually abolish subsidy. But meanwhile, international crude oil prices started surging, putting the government in a serious bind.Unable to subsidise retail sale of fuel prices out of budget, the government decided to resort to issuance of oil bonds. These oil bonds are just a way to defer payment of the government's liabilities on petroleum subsidy and not a solution.

Hardnews, has concluded that issuance of oil bonds is unethical because it passes on liabilities of the current consumption to future generations.Even the committee set up by the government in 2006 under the chairmanship of C Rangarajan to look into key issues relating to pricing and taxation of petroleum products has lambasted subsidisation of fuel prices through oil bonds. The committee has said in its report: So far as the government is concerned, the quantum of budgetary support should be explicit and transparent. The cost of subsidy should be met through current provisioning without any recourse to oil bonds. The practice of issuing oil bonds is strictly inadvisable as it does not resolve the problem; it only postpones the resolution while compounding the economic and financial costs.

Besides, the existing petroleum subsidy regime is also bleeding upstream oil companies such as Oil and Natural Gas Corporation (ONGC) and Oil Indian Ltd by mandating one-third contribution by them towards total under-recoveries reported by OMCs. For example, ONGC had to contribute as much as Rs 4,899 crore in the latest quarter alone, by providing discounts on crude sale to OMCs. Unsurprisingly, ONGC's net profit slumped 43 per cent in the quarter.

But ironically, OMCs such as Indian Oil (IOC) and Bharat Petroleum (BPCL) have reported higher profits for the same quarter despite sharp decline in their gross refining margin (GRM).Meanwhile, Petroleum Federation of India (Petrofed), an organisation of key Indian petroleum companies, has also asked for a review of the existing petroleum subsidy regime. It has suggested that if required, the government might as well provide fuel subsidies directly to end consumers instead of routing it through the OMCs.